The new law also prohibits recharacterizing amounts transferred to a Roth IRA from other retirement plans, such as 401 (k) or 403 (b) plans. The tax code allows only eligible cumulative distributions to be converted into individual Roth retirement accounts. This means that, in addition to the minimum distributions required, there are other items that cannot be converted. These include 72 (t) payments, distributions due to financial hardship, distributions corrective for excessive deferrals, and distributions considered (i.e., funds from an inherited IRA are not eligible to become a Roth IRA).
The RMD you withdraw from a traditional, accrued, SEP or SIMPLE IRA cannot be converted into a Roth IRA nor can it be left in the original account. If you've made non-deductible contributions to a non-Roth IRA in the past, you can't choose what portion of the funds from a non-Roth IRA you want to convert to a Roth IRA. According to many experts, a Roth IRA is the best retirement account that exists and offers enormous benefits, such as tax-free income and the ability to leave money tax-free to heirs. This form could be particularly beneficial if you intend for the money to go to someone other than your spouse, since the IRA's inheritance rules are special and more advantageous.
If your IRA savings are comprised entirely of non-deductible IRAs, you can convert them to a Roth IRA relatively easily. While converting to a Roth IRA may be atypical for some people, many others who earn too much with a typical Roth IRA make a clandestine conversion to a Roth IRA every year. A traditional deductible IRA is the most common type and is probably what most people consider an IRA. Converting a Roth IRA involves the transfer of retirement assets to a new or existing Roth IRA.
In their rush to make the conversion, some IRA owners may convert all of their account balances without knowing that their RMDs cannot be converted to Roth IRAs. Withdrawals from a Roth IRA are tax-exempt if you've had a Roth account for at least five years and are 59 and a half years old or older or qualify for an exception. People first make a contribution to a non-deductible IRA and then transform it into a Roth IRA, the so-called clandestine Roth IRA approach. A clandestine Roth IRA refers to a two-step maneuver that people with high incomes can use to get around the income limits of Roth IRAs.
The beneficiary of a plan other than their spouse who converts inherited plan balances into an inherited Roth IRA should know that the funds cannot be used for their own Roth IRA. If you have traditional IRAs with deductible contributions, you'll need to consider this if you convert any non-deductible amount into a Roth IRA. But what if you have another retirement plan? The good news is that you can convert plans such as a 401 (k) or a traditional IRA into a Roth IRA and take advantage of their range of benefits, and now may be a good time to do so.